Retirement becomes a hot topic for Gen X-ers as they enter their 50s. We discuss how to get the right asset for your future with Jacob Sadler, founder and senior advisor at Curio Wealth based in Asheville, N.C.
Larry Light: Why does retirement planning become more crucial as you enter your 50s?
Jacob Sadler: Retirement planning takes on a heightened sense of urgency then because retirement is no longer a distant concept—it’s on the horizon. This is the decade when you start to seriously evaluate whether you can sustain the lifestyle you envision in retirement. You may find yourself scrutinizing your investment portfolio more closely, wondering if it’s appropriately structured to provide the necessary income and security once you stop working. The importance of making informed, strategic adjustments during this period cannot be overstated, as the choices you make now will have a lasting impact on your financial independence in retirement.
Light: How does asset allocation play a pivotal role in shaping your retirement portfolio?
Sadler: The correct mix of assets can help you strike a balance between growth and safety, aligning your portfolio with your long-term retirement objectives. For example, a portfolio with a higher percentage of stocks might offer greater growth potential but also comes with increased risk. As retirement nears, it is often appropriate to gradually shift to a more conservative allocation, increasing your exposure to bonds. This approach helps protect the wealth you’ve accumulated from the volatility of the stock market, so that your nest egg remains intact when you need it most.
Light: Why do experts offer such differing advice on asset allocation, and how should you navigate this?
Sadler: The variety of opinions on asset allocation stems from the fact that there isn’t a one-size-fits-all solution. Each individual’s financial situation, risk tolerance and retirement goals are different. Some advisors advocate for maintaining a balanced portfolio, often suggesting a 50%-50% split between stocks and bonds, to help both growth and stability. Others may encourage sticking with a more aggressive growth strategy, with over 70% allocated to stocks, to maximize returns.
If you do the hard work to identify the appropriate allocation heading into retirement, you can go a long way toward taking the guess work managing your portfolio while also taking money out. For most people entering retirement, the prospect of taking money out of their savings instead of adding to it is extremely daunting. Identifying your allocation and establishing your set of rules of maintaining it provides the structure that is needed to contend with the fear and emotion that comes with taking money out. This is why personalized advice from a financial advisor is invaluable. They can help you navigate the conflicting advice and tailor a strategy that’s right for you.
Light: What is the “glide path” strategy, and why is it a recommended approach for retirement?
Sadler: The glide path strategy is a method of asset allocation that gradually shifts your portfolio’s focus from growth priority to an income priority as you near retirement. Early in your career, your portfolio might be heavily weighted toward stocks, which offers potentially higher returns but come with greater risk. However, as you approach retirement, the glide path strategy involves progressively increasing your allocation to bonds, which can be more stable than stocks and less volatile.
This gradual transition helps protect your portfolio from the sequence of returns risk—the danger that a market downturn in the early years of retirement could significantly diminish your nest egg. Think of the glide path strategy like a plane making a smooth descent before landing. It’s designed to reduce risk and help to secure financial landing into retirement. While the glide path is not the only approach to asset allocation, it’s particularly effective for those who want to balance growth and preservation as they transition into this new phase of life. This strategy underscores the importance of adapting your financial plan to your life stage, so that your portfolio continues to meet your evolving needs.
Light: What are the three main types of asset allocation strategies, and how does the glide path fit into this framework?
Sadler: At the most general level, the three categories of asset allocation strategies in personal finance are: static allocation, dynamic allocation and reactive allocation.
With static allocation, there is a smplicity in choosing a fixed ratio of stocks to bonds and maintaining it throughout your saving years. For example, you might decide on a 60%/40% split and stick with it.
However, a purely static allocation doesn’t account for changing goals as you approach retirement. If you’re risk-averse in your 50s, you might shift to a conservative allocation too early, potentially limiting your ability to grow your wealth sufficiently. On the other hand, maintaining an aggressive, growth-focused portfolio could expose you to significant risks, particularly the sequence of returns risk, when you enter retirement. If you do utilize a static allocation, it still remains important to monitor your situation for any changes that could necessitate an adjustment in allocation, and a change toward a more dynamic model.
Light: And dynamic allocation? Sounds like this strategy is the one to use.
Sadler: Here is where the glide path strategy comes in. You adjust your ratio of stocks to bonds over time, aligning your portfolio with your changing goals and risk tolerance as you move closer to retirement. The glide path approach allows for a gradual shift from growth to preservation, managing risk while still enabling growth during the earlier stages of your retirement savings journey.
The main challenge with dynamic allocation is that if there is not a prescribed and structured plan for changing allocation, the temptation to time the market creeps in. Dynamic allocation requires careful planning and professional execution to maximize its benefits, but when done correctly, it offers a balanced approach to asset management.
Light: I suspect reactive allocation is the one to avoid?
Sadler: Yes, this involves making frequent, short-term adjustments to your asset mix based on market trends, often in an attempt to chase short-term gains. This approach, also known as market timing, is generally ineffective and can lead to poor investment outcomes. Chasing returns based on fear or market movements often results in buying high and selling low, which is a losing strategy in the long run.
Understanding these different strategies helps you choose an approach that aligns with your financial goals, risk tolerance and retirement timeline. The glide path strategy, with its gradual and planned adjustments, is often the most reliable method for those seeking to manage risk while still pursuing growth as they near retirement.
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